Dollar weakness allows gold to shine through record level
October 7, 2009
By Ethel Hazelhurst
The gold price hit a record high of $1 043.78 (R7 730) an ounce in New York yesterday - hardly pausing as it soared through its previous peak of $1 033 in March last year.
The sharp move came as the dollar weakened on speculation oil-exporting countries did not want to trade in dollars.
Gold's strength helped the rand regain ground lost last week, after the deal between telecoms companies MTN and India's Bharti Airtel was called off. The currency was bid yesterday at R7.38 to the dollar at 5pm, from R7.6478 on Friday.
The precious metal continues to outperform oil, despite the traditional link between the two commodities because of their role as inflation hedges.
Manqoba Madinane, a commodity analyst at Standard Bank, said oil prices rose in early trade, but "nervousness over inventory data" had capped the increase.
He added that the market was expecting disappointing data from the American Petroleum Institute, a private sector organisation that monitors US oil inventories.
Expectations of rising inventories came after poor US employment data last week created doubts about the strength of the economic recovery and therefore demand for oil.
Oil traded yesterday at about $69 a barrel - after rising close to $75 in mid-September.
Madinane said, in contrast, that though physical demand for gold had been weak in Asia, investors continued to buy the metal as a financial investment. And its attractions had been enhanced by concerns over the health of the financial system.
Matthew Turner, a senior commodity analyst at London-based VM Group, said that yesterday's gold rally was driven by a weak dollar.
"Gold tends to benefit more from dollar weakness than oil because it is seen as a more investable commodity and one that is in a sense an 'anti-dollar' play," he said.
Turner said the relationship between the two commodities had varied over time.
"If you divide the price of one ounce of gold by the price of a barrel of oil, the ratio was about six, when oil peaked in July 2008, then soared to above 27 between late December last year and February this year as oil fell back to about $35 and gold remained strong.
"Since then, oil has done better and the ratio returned to about 13 in June, and has fluctuated since in a range of about 13 to 15. The average since 1980 is about 15.5."
The improvement in the gold price since last month, relative to oil, will help South Africa's balance of trade.
Nicky Weimar, a senior economist at Nedbank, said oil made up 17.3 percent of imports last year and gold made up about 7.4 percent of exports.
She said the trend would benefit the terms of trade, but cautioned that the prices of other important exports, like coal and base metals, were moving in line with oil rather than gold.
The relatively strong rand and the relatively stable oil price are improving the outlook for the petrol price, after a 40c cut to R7.65 a litre as from today.
For a graph comparing the London PM gold price fix to the price of Brent crude oil - click here
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